SC Asset Corporation

SC Asset Corporation Plc (SC)

Investment thesis: We have initiated coverage on SC with a BUY rating and a YE12 target price of Bt18.60, based on a sum-of-the-parts valuation, due to its twin business model (residential sales and office & land rentals)—a target housing PER of 7x (more than 1SD below SC's FY05-10 mean) and Bt5.2/share of rental asset value (a 30% discount to appraised value). Our target price implies an FY12 PER of only 7.5x, which is much cheaper than the 10x sector mean. SC currently trades at an FY12 PER of just 5.3x, deeply discounted to its FY05-10 average of 12.3x. The stock deserves a re-rating, as its profit and ROE will hit new record highs this year and next. FY12 earnings growth will outperform the sector (20% for SC versus 15% for the sector). Despite its share price rally (up 61% YTD), we see scope for further appreciation with eased political risk. We view that SC's share price is likely to repeat its historical pre-2010 pattern, which was broadly consistent with the sectoral valuation.

Theme#1—favorable supply of upper-mid to high-end SDHs: The firm caters to the upper-mid range to high-end segments—particularly for SDHs (84% of the current sales portfolio). There are no concerns about oversupply in these segments, as new units launched per year in FY08-10 were stable (below the FY04-10 average). Note that total new housing supply (across all price segments) hit a record high last year.

Theme#2—market share-driven: SC's market share in the upper-mid to high-end SDH segments jumped from below 5% before 2009 to almost 20% in 2010. SC's low-rise presales have consistently set new records. The healthy balance sheet (a 0.5x net gearing ratio at end-June) will support a heavier launch schedule (Bt15.5bn for FY11, up 70% YoY).

Theme#3—to deliver record earnings: Management targets record revenue of Bt8bn for FY11 and Bt10bn for FY12. We forecast a strong earnings CAGR of 18% for FY10-12 (outperforming the broad SET's 15%). Profit will increase YoY and QoQ in 3Q-4Q11.

Theme#4—hidden asset value: We value SC's rental assets at Bt4.8bn, equal to 55% of its market capitalization. The firm has scope to gain from reappraised value, due to higher replacement (freehold land at good locations) and construction costs.

Recommendation and valuation

Initiates as a BUY rating—good mid-scale play for record high performances: We have initiated coverage on SC with a BUY rating and a YE12 target price of Bt18.60, based on a sum-of-the-parts valuation, due to its twin business model (residential sales and rentals of offices and land)—a target housing PER of 7x (more than 1SD below SC's FY05-10 mean) and Bt5.2/share of rental asset value (a 30% discount to appraised value). Our target price implies an FY12 PER of only 7.5x, which is much cheaper than the 10.0x sector mean. SC currently trades at an FY12 PER of just 5.3x, deeply discounted to its FY05-10 average of 12.3x. Note that QH, which has a similar business model—residential sales and rental businesses—is much more expensive (an FY12 PER of 5.3x for SC versus 8.0x for QH), even though it has a lower ROE (16% for SC versus 12% for QH).

Why we think SC deserves a re-rating: Fundamentally, the stock deserves a re-rating, as its earnings and ROE will hit new record highs this year and next. FY12 profit growth will outperform the sector (20% for SC versus 15% for the sector). ROE will rise from 14.6% in FY11 to a new high of 16.0% in FY12. SC's share price has increased 61% YTD (outperforming the SET index), due to perceptions of easing political risk. In 2010 (see Figure 10), the stock price underperformed the sector, particularly during the Red Shirt uprising in 2Q10 when it was briefly suspended from trading (May 19-24, 2010) after the Center for Resolution of the Emergency Situation (CRES) prohibited the firm from engaging in transactions with financial institutions. Now that the Puea Thai Party is the government and the former CEO of SC is the PM, political risk has eased. As such, we view that the stock's PER will revert to its historical (pre-2010) pattern of being roughly in line with the sector mean.